Buying a home is a big decision and an important milestone in everybody’s life. It is perhaps the biggest purchase that a person will make in their lifetime. Most home buyers borrow money to buy a home. Various banks and financial institutions advertise home loans and mortgages for people with all sorts of financial backgrounds. Given the importance of financing in a home purchase, having knowledge about mortgages and how they are processed can help you immensely in your home-buying journey.
When one looks up mortgages, pre-qualification and pre-approval are two terms which are thrown around quite often. Do bear in mind that pre-qualification is not the same as pre-approval. Pre-qualification is a quick and easy way to simply explore what kind of loan amount a borrower can avail. It is an informal process in which the bank/financial institution uses basic information which you provide to come up with an estimate of how much you can spend on a house. The only information you provide the lender are the details about your assets, liabilities, and income levels. Besides providing you with a mortgage estimate, you may even get some preliminary terms and conditions. But that is where it all ends.
A mortgage pre-approval, on the other hand, is a more thorough and concrete process. It comes with an actual loan offer at the end of it all. The bank or financial institution checks not only your financial information, but also your credit quality and your employment details. Once this process is complete, you will actually receive a specific loan amount with an interest rate, and this offer is usually valid for a limited time of a few months. Going for a mortgage pre-approval is more time consuming and may require more documentation from your end. But, it has its benefits too. In many cases, the buyers will expect a seller to have a mortgage pre-approval, as they would want to see proof of financing capability before even agreeing to negotiate.
In order to get a mortgage pre-approval, you will need to show the following:
This situation changes quite significantly if you are self-employed. In such cases, you will have to submit details and paperwork about your business, its tax returns, its HR and employee details, etc. The lender will want to establish that your business is stable and it will provide you with a reliable income stream which will service the mortgage that you are seeking to avail.
After all of the above is submitted and the lender approves your file, you will get a PAL or a mortgage pre-approval letter. Once you have the PAL, it’s time to negotiate hard with the seller. It is best not to disclose the details of your pre-approved amount at the beginning, as it compromises your negotiating position. But if the seller absolutely insists, then make an offer and disclose the letter. A pre-approval gives you the power to make the offer and drive a bargain because you do not have to wait for any financing or processing. You are ready to buy the house right away. All that remains to be done is an appraisal, underwriting, and final loan approval. Holding a PAL in your hand demonstrates that you are a serious buyer with all your finances in place.
If for some reason, your mortgage pre-approval gets rejected, then approach another 3 lenders. You do not have to depend on one lender, as all of them will give you different opinions and offers/rejections. That is the beauty of this entire process. It is subjective, and you need to get the best offer that you can. You may be surprised to know that according to a recent Consumer Financial Protection Bureau report, over three-fourths of loan applicants apply to only one lender for a mortgage! You can be smarter and be part of the remaining 25% who gets multiple offers and compares the advantages and disadvantages for each mortgage offer.
While applying with multiple lenders for your home mortgage, the one thing that you need to make sure of is to apply together, at the same time. Do not wait for one lender to give you a yes/no before going to another lender. Try to ensure that all the lenders you approach perform the credit check within 45 days. As you may have read, performing multiple credit checks repeatedly does affect your credit score. However, this effect is minimal if all the credit checks are performed within 45 days. So, approach multiple lenders simultaneously and get all the credit checks done in that window.
The one situation when you really have a problem is if all the lenders you approach turn down the loan because of a certain specific reason. In such a case, you know that the problem is on your end, and it’s not really the lender’s subjectivity. Whether it’s the lender or a shortcoming on your end, your entire mortgage application process will be smooth and stress-free if you receive professional guidance along the way to overcome any challenges that stand between you and the mortgage pre-approval. Payday Loan Helpers works with many borrowers on a daily basis and connects them to a network of lenders for availing mortgages. Feel free to fill out the form below or call us and one of our trained professional executives will assist you with any questions or doubts that you may have about the mortgage pre-approval process.